German Force-Fed Austerity to Hurt for Years: Sebastian Dullien

Dec. 15 (Bloomberg) -- Only a few months ago, there was an
intense debate and a lot of resistance in Germany to setting up
the European Financial Stability Facility and European Stability
Mechanism. Part of the resistance wasn’t about the billions of
euros lent to weaker partners in the currency, but about whether
the German parliament was giving away too much sovereignty.

Against this background, the fiscal compact the German
Chancellor Angela Merkel has pushed for, and which now will be
included in a new treaty, must have come as a surprise. After
all, the new rules give away even more national sovereignty.

The agreement all but cedes the euro-zone countries’
individual rights to borrow in financial markets and reduces
their national parliaments’ room to set policy. This can only be
understood in the context of the very specific German debate.
Within Germany, the perception is that the Germans have been
fiscally responsible and that the new treaty is just putting
into a binding rule what the country has been doing all along.

Although this perception isn’t quite correct, given
Germany’s violations of the Stability and Growth Pact in the
early 2000s, it holds a grain of truth: The new rules are
modeled after a rule that Germany wrote into its constitution in
2009, limiting structural deficits to 0.35 percent of annual
output. As long as the German budget is in line with the German
constitution, the country has no problems fulfilling the new
commitments.

The German government’s approach, however, is likely to
come with a lot of collateral damage.

First, the agreement has alienated smaller European
partners, which now will have little say in European Union
affairs.

Second, failing to get the British to agree to treaty
changes, the EU might lose relevance in regulatory and foreign
policy issues. That would mean reduced global influence for
Europe.

Third, while the German government calls the reforms a
fiscal union, such a union means joint liability for certain
types of public debt as well as taxation and spending powers to
counteract adverse economic developments. Such a union would
make sense: The current crisis isn’t merely a result of
profligate governments, but stems from the imbalances that have
led to boom and bust cycles in the euro periphery.

In principle, more centralized fiscal and economic
policies, including regional transfers, could prevent or damp
such cycles. The proposed set-up does nothing to correct or
prevent new imbalances, though. The underlying problems of weak
economic growth in the euro area aren’t solved, and may be made
worse by years of austerity.

More treaty changes will be needed to turn the currency
union into an economic entity that can deliver more than
economic stagnation and price stability. Europe’s leaders need
to admit to their constituencies that the euro area will never
become a dynamic economy if monetary union isn’t complemented by
a real fiscal union, including EU power of taxation, a much
larger EU budget and the ability to issue euro bonds.
Unfortunately, in spite of almost monthly crisis summits, such a
solution still seems a long way off.

(Sebastian Dullien is professor of international economics
at HTW Berlin-University of Applied Sciences and senior policy
fellow at the European Council on Foreign Relations. The
opinions expressed are his own.)